Identifying Potential Trend Reversals using Candlesticks


Candlesticks are the focus of this article. Specifically, discussing different candlestick formations which allow traders to build a better idea about upcoming price events.

Candlestick formations alone shouldn’t guide your buying and selling decisions. A firm understanding on these will help paint a better pricing picture when used in conjunction with other studies. Spotting trend reversals using candlesticks will help you see something that your charting studies might not be able to.

Being able to easily spot and identify them will make you a stronger trader.

Note: If you are super new to trading and don’t understand what exactly candle sticks are yet, read my article explaining them linked here, first.


Candlesticks signaling an uptrend Reversal:

The Hammer

The Hammer is a candlestick normally found after a downtrend. It signals a possible reversal or price support level.

A Hammer is formed when a security trades significantly lower than its opening price throughout the period. It then later rallies and closes above or just slightly below the opening price.

Since the price was able to recover from such downward selling pressure, especially during a downtrend. We see that something is still attracting plenty of buyers.

After a long downtrend, heavy selling pressure being beat by buyers’ might imply a price support or change in the market outlook. This is seen as a potential indicator for a reversal from the current downtrend.

Act only when you see an additional Bullish Confirmation.

A bullish confirmation following a hammer would be an opening price gap up the next day, Or that the following day closes at a higher price and has increased volume as well.

A price increase, combined with higher trading volume is always a bullish indicator.


Candlesticks signaling an uptrend Reversal:

The Inverted Hammer

The Inverted Hammer is very similar to the hammer and is normally found after a downtrend. It signals a possible reversal or price support level.

It forms when buyers of a security pull the price significantly higher above the opening price. But, by the end of the day sellers are able push the price back down, very close to the opening price.

After a prolonged downtrend it is unusual for a price to make significant gains. Buyers came to the market and overpowered sellers for most of the day. They managed to end the trading period on a positive note for a price gain. This might imply that something may have changed in market outlook or that the market thinks there is a price support at this level.

Act only when you see an additional Bullish Confirmation.

A bullish confirmation following a hammer would be an opening price gap up the next day. Or, that the following day closes at a higher price and has increased volume as well.

A price increase, combined with higher trading volume is always a bullish indicator.



Candlesticks signaling a downtrend Reversal:

The Hanging Man

The Hanging Man has the same formation and body type as the hammer. The only difference is that it forms after an uptrend.

It is created when the price drops significantly from the opening price throughout the day. Only towards the end of the period buyers are able to push the price back up.

The downward pressure from sellers shows that the market thinks the price may have reached a resistance. It is possible that something has changed in the market outlook.

You might feel relieved that by the end of the day buyers are able to pull up the price from the low, however, seeing downward pressure that strong should raise a red flag for caution moving into the next day.

Act only when you see an additional Bearish Confirmation. Just because something spooked sellers and made them sell doesn’t mean the uptrend will reverse. Just be extremely cautious moving forward.

A bearish confirmation would consist of a large gap down on the following day’s opening price and/or downward price action associated with simultaneously higher volume.

A dropping price combined with higher volume should set off the red flags for a possible reversal.


Candlesticks signaling a downtrend Reversal:

The Shooting Star

The Shooting Star has the same formation and body type as the inverted hammer. The only difference is that it forms after an uptrend.

It is created when the price increases significantly from the opening price throughout the day, and sellers take control by the end and push the price all the way back down near the open price.

The downward pressure from sellers shows that the market thinks the price may have reached a resistance or that something has changed in the market outlook.

The fact that by the end of the day sellers are able to push down the price all the way from the high, shows that the downward pressure is significant. You might want to think that because the day ended on a positive note that everything is ok… it might be, just be careful.

Seeing such downward pressure should raise a red flag for caution moving into the next day.

Act only when you see an additional Bearish Confirmation. Just because something spooked sellers and made them sell doesn’t mean the uptrend will reverse. Just be extremely cautious moving forward.

A bearish confirmation would consist of a large gap down on the following day’s opening price and/or downward price action associated with simultaneously higher volume.

A dropping price combined with higher volume should set off the red flags for a possible reversal.


Candlesticks signaling a downtrend Reversal:

The Evening Star

At a first glance the Evening Star is basically just a DOJI that forms after a price advance.

Well, it actually is just a DOJI and it isn’t called an Evening Star until the day following this DOJI, shows downward movement and closes at a lower price.

This is a possible early warning that a downward reversal is coming.

After an uptrend the DOJI signals that the price is having trouble attracting buyers to compete with the sellers and may have possibly hit a resistance level — the negative price action following this DOJI turns it into an evening star.

The evening star is a good indicator that the uptrend will reverse.
Unlike the other formations discussed above, the evening star kind of acts as it’s own bearish confirmation due to the negative day following the DOJI.


These are all useful indicators that a possible trend reversal may take place soon. Understand these, and it will help you identify trends better.

Like I mentioned at the beginning, don’t base your trades solely on this — only use it to assist other studies that you have in place so that you aren’t changing or establishing positions based on false confirmations.

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About the author: Dominick Muniz
Creator, web-developer, and writer at The Trading Space.

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